This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Understanding the Forward Premium Puzzle: A Microstructure Approach

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Craig Burnside
Martin Eichenbaum
Sergio Rebelo

Additional information is available for the following registered author(s):

Abstract

High interest rate currencies tend to appreciate relative to low interest rate currencies. We argue that adverse selection problems between participants in foreign exchange markets can account for this "forward premium puzzle." The key feature of our model is that the adverse selection problem facing market makers is worse when an agent wants to trade against a public information signal. So, when based on public information, the currency is expected to appreciate, there is more adverse selection associated with a sell order than with a buy order. (JEL E43, F31, G15)

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10.1257/mac.1.2.127
File Format: text/html
File Function:
Download Restriction: no
File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.1.2.127
File Format: application/pdf
File Function:
Download Restriction: Access to full text is restricted to AEA members.
File URL: http://www.aeaweb.org/aej/mac/data/2008-0028_data.zip
File Format: application/zip
File Function: dataset accompanying article
Download Restriction: no

Publisher Info
Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 1 (2009)
Issue (Month): 2 (July)
Pages: 127-54
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:aea:aejmac:v:1:y:2009:i:2:p:127-54

Contact details of provider:
Email:
Web page: http://www.aeaweb.org/aej-macro
More information through EDIRC

Order Information:
Web: http://www.aeaweb.org/subscribe.html

For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).

Related research
Keywords:

Other versions of this item:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2004. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Review of Economic Studies, Blackwell Publishing, vol. 71(1), pages 87-113, 01. [Downloadable!] (restricted)
    Other versions:
  2. Rui Albuquerque & Gregory H. Bauer & Martin Schneider, 2007. "International Equity Flows and Returns: A Quantitative Equilibrium Approach," Review of Economic Studies, Blackwell Publishing, vol. 74(1), pages 1-30, 01. [Downloadable!] (restricted)
    Other versions:
  3. Albuquerque, Rui & de Francisco, Eva & Marques, Luis, 2006. "Marketwide Private Information in Stocks: Forecasting Currency Returns," CEPR Discussion Papers 5604, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Michael J. Fleming, 1997. "The round-the-clock market for U.S. Treasury securities," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-32. [Downloadable!]
  5. Charles Engel, 1996. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Philippe Bacchetta & Eric van Wincoop, 2006. "Incomplete information processing: a solution to the forward discount puzzle," Working Paper Series 2006-35, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  7. Han, Bing & Hirshleifer, David & Wang, Tracy Yue, 2005. "Investor Overconfidence and the Forward Discount Puzzle," Working Paper Series 2005-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
    Other versions:
  8. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September. [Downloadable!] (restricted)
  9. Massa, Massimo & Simonov, Andrei, 2003. "Reputation and interdealer trading: a microstructure analysis of the Treasury Bond market," Journal of Financial Markets, Elsevier, vol. 6(2), pages 99-141, April. [Downloadable!] (restricted)
  10. Bansal, Ravi & Dahlquist, Magnus, 2000. "The forward premium puzzle: different tales from developed and emerging economies," Journal of International Economics, Elsevier, vol. 51(1), pages 115-144, June. [Downloadable!] (restricted)
  11. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Craig Burnside & Martin Eichenbaum & Isaac Kleshchelski & Sergio Rebelo, 2006. "The Returns to Currency Speculation," NBER Working Papers 12489, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2008. "Carry Trades and Currency Crashes," NBER Working Papers 14473, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Hanno Lustig & Adrien Verdelhan, 2008. "Note on The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk," NBER Working Papers 13812, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Emmanuel Farhi & Xavier Gabaix, 2008. "Rare Disasters and Exchange Rates," NBER Working Papers 13805, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Menkhoff, Lukas & Sarno, Lucio & Schmeling, Maik & Schrimpf, Andreas, 2009. "Carry Trades and Global FX Volatility," MPRA Paper 14728, University Library of Munich, Germany. [Downloadable!]
  6. Ranaldo, Angelo & Söderlind, Paul, 2009. "Safe Haven Currencies," CEPR Discussion Papers 7249, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
Statistics
Access and download statistics

Did you know? RePEc also has a blog.

This page was last updated on 2009-11-26.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.